10-Q 1 tenq.txt MISSISSIPPI VALLEY BANCSHARES, INC. FORM 10-Q FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2002 ---------------------------------------------- OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to ----------------------- ------------------ Commission file number 0-22008 ------- MISSISSIPPI VALLEY BANCSHARES, INC. ---------------------------------------------------------------- (Exact name of registrant as specified in its charter) MISSOURI 43-1336298 ----------------------------------------------- ------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 13205 Manchester Road, St. Louis, Missouri 63131 ----------------------------------------------- ------------------- (Address of principal executive offices) (Zip Code) (Registrant's telephone number, including area code) (314) 543-3512 ----------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No . --- --- INDICATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE ISSUER'S CLASSES OF COMMON STOCK, AS OF JULY 19, 2002: Common Stock, $1.00 par value 9,567,812 ----------------------------- ---------------- Class Number of Shares THIS DOCUMENT CONSTITUTES PART OF A PROSPECTUS COVERING SECURITIES THAT HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933. MISSISSIPPI VALLEY BANCSHARES, INC. ----------------------------------- INDEX ----- Page No. -------- PART I. FINANCIAL INFORMATION --------------------- ITEM 1. Financial Statements Condensed Consolidated Balance Sheets -- June 30, 2002 and December 31, 2001 3 Condensed Consolidated Statements of Income -- Quarters Ended June 30, 2002 and June 30, 2001 4 Consolidated Statements of Changes in Shareholders' Equity -- Six Months Ended June 30, 2002 and June 30, 2001 5 Condensed Consolidated Statements of Cash Flows -- Six Months Ended June 30, 2002 and June 30, 2001 6 Notes to Condensed Consolidated Financial Statements 7-8 ITEM 2. Management's Discussion and Analysis of Results of Operations and Financial Condition 9-16 PART II. OTHER INFORMATION ----------------- ITEM 4. Submission of Matters to a Vote of Security Holders 17 ITEM 6. Exhibits and Reports on Form 8-K 17-18 SIGNATURE 19 --------- 2 PART I. FINANCIAL INFORMATION ------------------------------ ITEM 1. FINANCIAL STATEMENTS ------- --------------------- MISSISSIPPI VALLEY BANCSHARES, INC. ----------------------------------- CONDENSED CONSOLIDATED BALANCE SHEETS -------------------------------------

3 MISSISSIPPI VALLEY BANCSHARES, INC. ----------------------------------- CONDENSED CONSOLIDATED STATEMENTS OF INCOME ------------------------------------------- (UNAUDITED)

4 MISSISSIPPI VALLEY BANCSHARES, INC. ----------------------------------- CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY ---------------------------------------------------------- YEAR TO DATE JUNE 30, 2002 AND 2001 (UNAUDITED) (Dollars in Thousands)

5 MISSISSIPPI VALLEY BANCSHARES, INC. ----------------------------------- CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS ----------------------------------------------- (UNAUDITED)

6 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS ---------------------------------------------------- 1. Basis of Presentation The condensed consolidated financial statements include the accounts of Mississippi Valley Bancshares, Inc. (the "Company") and its wholly-owned subsidiaries, Southwest Bank of St. Louis, Southwest Bank, Belleville, Southwest Bank of Phoenix (the "Banks"), MVBI Capital Trust and Mississippi Valley Capital Company, a venture capital subsidiary. Significant intercompany accounts and transactions have been eliminated in consolidation. The results of operations for the interim periods shown in this report are not necessarily indicative of results to be expected for the entire year. In the opinion of management, the information contained herein reflects all adjustments necessary to make the results of operations for the interim periods a fair statement of such operations. All such adjustments are of a normal recurring nature. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's annual report on Form 10-K for the year ended December 31, 2001. 2. Comprehensive Income Following is a summary of other comprehensive income components and related income tax effects:

7 3. Earnings per Share Basic earnings per share is computed by dividing net income by the weighted average common shares outstanding.

Diluted earnings per share gives effect to the weighted average shares outstanding and average dilutive common share equivalents outstanding.

4. Acquisition of Mississippi Valley Bancshares, Inc. On June 17, 2002, the Company and Marshall & Ilsley Corporation (M&I) entered into a definitive agreement pursuant to which M&I will, subject to shareholder and regulatory approvals, acquire the Company. 8 ITEM 2. ------- MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS ----------------------------------------------- OF OPERATIONS AND FINANCIAL CONDITION ------------------------------------- The following discussion should be read in conjunction with the attached condensed consolidated financial statements and notes thereto, and with the Company's audited financial statements and notes thereto for the year ended December 31, 2001. SUMMARY OF EARNINGS ------------------- Consolidated net income for the second quarter of 2002 was $7,439,000, up $668,000 or 9.9% from $6,771,000 earned during the second quarter of 2001. On a per share basis, net income was $.78 in the second quarter of 2002, up from $.71 in the same period in 2001. Increased net interest income and a reduced provision for possible loan losses were primarily responsible for the improved performance. Partially offsetting those advances was a downturn in total noninterest income. Net income for the first half of 2002 was $15,042,000, up $1,892,000 or 14.4% from $13,150,000 for the first half of 2001. On a per share basis, net income was $1.58, up from $1.38 in the first half of 2001. Greater net interest income and a sharply lower provision for loan losses were the primary contributors to the improved performance. The Company's loan loss provision declined to $2,700,000 from $6,639,000 for the first six months of 2001 primarily because net loan charge-offs of $764,000 were down from net charge-offs of $2,818,000 in 2001. Total noninterest income was $7,716,000 for the first six months of 2002, down from $10,026,000 in the same period in 2001 due primarily to losses on interest rate derivative contract transactions of $1,496,000 in 2002 compared with gains of $1,516,000 on similar transactions in 2001. Total noninterest expenses rose only slightly from previous year levels. For the quarter and six months ended June 30, 2002, the Company's return on average assets was 1.47% and 1.49% compared with 1.35% and 1.33% in the same periods in 2001, respectively. At June 30, 2002, total equity capital was $170,702,000, up from $153,910,000 at June 30, 2001. The Company's return on average equity was 17.76% and 18.34% for the quarter and six months ended June 30, 2002, up from 17.59% and 17.50% for the same periods in 2001, respectively. Total assets were $2,059,080,000 with loans up to $1,570,578,000 at the end of June 2002. NET INTEREST INCOME ------------------- The following discussion and tables set forth the composition of average interest-earning assets and interest-bearing liabilities along with accompanying interest income, expense, yields and rates, on a tax-equivalent basis. The tax-equivalent adjustments were approximately $63,000, $68,000, $128,000 and $138,000 for the three months and the six months ended June 30, 2002 and 2001, respectively. Net interest income on a tax-equivalent basis, divided by average interest earning assets represents the Company's net interest margin. 9 Three Months Ended June 30, 2002 and 2001 ----------------------------------------- Total tax-equivalent interest income for the three months ended June 30, 2002 was $28,741,000, down $8,116,000 compared to the same period in 2001. The 176 basis point decline in yields earned was primarily responsible for the decrease in interest earnings. Offsetting a portion of the yield related income decline was the effect of the $139 million increase in the volume of average loans outstanding. Funding the loan growth were proceeds from the sales and maturities of investment securities. Overall asset yields were 5.92% in the second quarter of 2002, down from 7.68% earned in the same period in 2001. Total interest expense for the second quarter of 2002 was $10,142,000, down $8,573,000 from $18,715,000 in the second three months of 2001. With average interest bearing deposits down only slightly from second quarter 2001 levels, nearly all the reduced interest expense costs were attributable to the lower rates paid on deposits and short-term borrowings in 2002. Rates paid on total interest bearing liabilities declined to 2.42% in 2002 compared with 4.41% in the second quarter of 2001. Overall tax-equivalent net interest income increased $457,000 because interest expense declined to a slightly greater extent than did interest income. The Company's net interest margin rose to 3.83%, up 5 basis points from 3.78% in the same period in 2001. Six Months Ended June 30, 2002 and 2001 --------------------------------------- Total tax-equivalent interest income for the first six months of 2002 was $57,039,000, down $18,231,000 from $75,270,000 in the same period in 2001. The reduced yields earned of 5.91% in the first half of 2002 were down from 7.98% in the same period in 2001 and were primarily responsible for the interest earnings decline. Limiting the interest earnings decline resulting from the lower rate environment was the increased interest earnings generated by the $123 million increase in average loans in the first half of 2002. Funding the loan growth in the first half of 2002 were proceeds from the sales and maturities of investment securities and greater non-interest bearing deposits. Total interest expense for the first half of 2002 was $20,262,000, down $19,992,000 from $40,254,000 in the same period in 2001. Nearly all the decrease in interest expense resulted from the lower rates paid on interest bearing liabilities in 2002. Overall rates paid on total interest bearing liabilities declined to 2.43% from 4.82% in the first six months of 2001. In summary, total tax-equivalent net interest income increased $1,761,000 as the decline in interest expense exceeded the decline in interest income. The Company's net interest margin for the first six months of 2002 was 3.81%, up from 3.71% in the same period in 2001. 10 AVERAGE BALANCES, INTEREST AND RATES

11 AVERAGE BALANCES, INTEREST AND RATES

12 The following table indicates, on a tax-equivalent basis, the changes in interest income and interest expense which are attributable to changes in average volume and changes in average rates, in comparison with the same period in the preceding year. The change in interest due to the combined rate-volume variance has been allocated to rate and volume changes in proportion to the absolute dollar amounts of the changes in each. CHANGES IN INTEREST INCOME AND EXPENSE VOLUME AND RATE VARIANCES

13 PROVISION FOR POSSIBLE LOAN LOSSES ---------------------------------- The provision for possible loan losses for the second quarter of 2002 was $1,189,000, down from $4,103,000 last year. For the first half of 2002 the provision for possible loan losses was $2,700,000, down from $6,639,000 for the same period in 2001. Net loan charge-offs of $764,000 in the first half of 2002 were down from $2,818,000 in the same period in 2001. The allowance for possible loan losses was $27,739,000 or 1.77% of loans outstanding at June, 30, 2002. This compared to $25,803,000, or 1.75% of loans at the end of 2001, and $27,837,000 or 1.96% of loans outstanding at June 30, 2001. In management's judgement, the allowance for possible loan losses is adequate to absorb potential losses in the loan portfolio. The following table summarizes, for the periods indicated, activity in the allowance for possible loan losses: Summary of Loan Loss Experience and Related Information -------------------------------------------------------

14 The following table summarizes nonperforming assets at the dates indicated:

NONINTEREST INCOME ------------------ For the second quarter of 2002 total noninterest income was $3,321,000, down from $5,516,000 in the same period in 2001. The Company had trading losses of $2,231,000 on interest- rate derivative contract transactions in the second quarter of 2002, compared with trading profits of $2,864,000 on similar activities in the second three months of 2001. More than offsetting the derivative trading losses were gains realized on sales of available for sale securities of $2,961,000 in 2002 while securities sales generated net gains of only $157,000 in the second quarter of 2001. For the first six months of 2002, total noninterest income was $7,716,000, down from $10,026,000 in the first half of 2001. Net losses on interest-rate derivative trading activities generated losses of $1,496,000 in 2002 compared with gains of $1,516,000 in 2001. Net gains of $3,991,000 were realized on securities sales in 2002, up from gains of $3,561,000 on sales of available for sale securities in the first half of 2001. A $580,000 write-down of certain investments in our venture capital subsidiary held down noninterest income in the first half of 2001 while 2002 had no similar write-downs. NONINTEREST EXPENSE ------------------- Total noninterest expense for the second quarter of 2002 was $8,907,000, up $46,000 from $8,861,000 in the second three months of 2001. For the first half of 2002 total noninterest expenses were $17,969,000, up $442,000 from the same period in 2001. Increased compensation due to additional personnel and merit raises were primarily responsible for the increase in overhead costs. Overall, the Company's efficiency ratio was 40.39% for the first six months of 2002 compared to 38.91% for the same period in 2001. 15 CAPITAL MANAGEMENT AND RESOURCES -------------------------------- As of June 30, 2002, the Company's total shareholders' equity was $170.7 million. New capital was provided in the first six months of 2002 by the Company's net earnings and by the exercise of stock options. Offsetting the Company's capital accumulation were the payments of cash dividends on common stock, the repurchase of 53,000 shares of common stock in connection with the Company's stock repurchase plan, and unrealized losses, net of tax on available for sale securities. The Company formed MVBI Capital Trust ("MVBI Capital"), a statutory business trust in 1997. The Company owns all the common stock of MVBI Capital. MVBI Capital sold 598,000 preferred securities, having a liquidation amount of $25 per security, for a total of $14,950,000. The distributions payable on the preferred securities will float with the 3-month Treasury plus 2.25%. The preferred securities are considered long-term borrowings and entitled "Guaranteed preferred beneficial interests in subordinated debentures" for financial reporting purposes. For risk-based capital guidelines the amount is considered to be Tier 1 capital. The analysis of capital is dependent upon a number of factors including asset quality, earnings strength, liquidity, economic conditions and combinations thereof. The two primary criteria currently in effect are the risk-based capital guidelines and the minimum capital to total assets or leverage ratio requirement. These regulatory guidelines require that Tier 1 capital equal or exceed 4.00% of risk-weighted assets, and that the risk-based capital ratio equal or exceed 8.00%. As of June 30, 2002 and December 31, 2001 the Company's Tier 1 capital was 11.06% and 10.59% of risk-weighted assets, and total risk-based capital was 12.31% and 11.85% of risk-weighted assets, respectively. The minimum acceptable ratio of Tier 1 capital to total assets, or leverage ratio, has been established at 3.00%. As of June 30, 2002 and December 31, 2001, the Company's leverage ratio was 9.23% and 8.17%, respectively. Management believes that a strong capital position provided by a mix of equity and long-term debt is essential. It provides safety and security for depositors, and enhances Company value for shareholders by providing opportunities for growth with the selective use of leverage. 16 PART II. OTHER INFORMATION ---------------------------- ITEM 4. Submission of Matters to a Vote of Security Holders --------------------------------------------------- On April 17, 2002 at the Company's Annual Meeting of Stockholders, stockholders took the following actions: a. Elected or re-elected all Management nominees to the Board of Directors. Vote tallies were as follows: Votes Votes In Favor Abstaining -------- ---------- Andrew N. Baur 7,447,840 670,796 Louis N. Goldring 7,993,621 125,015 Richard T. Grote 7,992,921 125,715 Mont S. Levy 7,993,721 124,915 Lewis B. Shepley 7,993,721 124,915 b. Approved an amendment to the Company's Articles of Incorporation to increase the Company's authorized common shares from 20,000,000 to 30,000,000 with 7,910,972 shares voted in favor; 101,287 shares voted against, and 106,377 shares abstained. c. Approved the Company's 2002 Stock Option Plan with 6,862,610 shares voted in favor; 310,813 shares voted against, and 69,454 shares abstained. d. Ratified the selection of Ernst & Young LLP as independent accountants for 2002 with 8,089,361 shares voted in favor; 17,025 shares voted against and 3,250 shares abstained. ITEM 6. Exhibits and Reports on Form 8-K -------------------------------- (a) Exhibits: 3 (i) Amendment to the Restated Articles of Incorporation of Mississippi Valley Bancshares, Inc. 99.1 Chief Executive Officer Certification 99.2 Chief Financial Officer Certification 17 (b) Reports on Form 8-K Other Events: ------------- o On June 18, 2002 the Company filed a Current Report on Form 8-K reporting that Mississippi Valley Bancshares, Inc. ("MVBI") and Marshall & Ilsley Corporation ("M&I") have entered into a definitive agreement pursuant to which M&I will, subject to shareholder and regulatory approvals, acquire MVBI in a merger transaction. o On June 21, 2002 the Company filed a Current Report on Form 8-K to file as an exhibit copy of a Shareholder Voting Agreement among certain shareholders of MVBI and M&I pursuant to which, among other things, such shareholders have agreed to vote their shares of MVBI common stock in favor of the merger of MVBI with and into M&I. The shareholders who have entered into the Shareholder Voting Agreement held in the aggregate approximately 37% of the outstanding shares of MVBI common stock as of June 17, 2002. 18 SIGNATURE --------- Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. MISSISSIPPI VALLEY BANCSHARES, INC. ----------------------------------------- (Registrant) Date: August 13, 2002 /s/ Paul M. Strieker --------------- --------------------------------- Paul M. Strieker, Executive Vice President, Controller and Chief Financial Officer (on behalf of the Registrant and as Principal Financial and Accounting Officer) 19

MISSISSIPPI VALLEY BANCSHARES INC 10-Q